Sunday, January 11, 2015

The Canadian tar sands have been very good to
Clean Harbors, a perennial Wall Street favorite that evolved from a disaster
cleanup business (for which the company’s web pages still carry a plug at the
bottom: “For 24-Hour Emergency Response, call 800.OIL.TANK”) into a
diversified industrial service company through 35-plus acquisitions costing
about $2 billion over 25 years.

The tar sands business came with the 2009
acquisition of Eveready, and so swiftly did CLH expand deeper into so-called
unconventional energy (everything from feeding and housing roughnecks in lodges
to hauling out drilling waste) that oil and gas exploration and production services
went from 0% of the company’s total business in 2008 to 27% in 2012, before the
$1.25 billion acquisition of Safety-Kleen got them into the lube oil re-refining
business, diluting the oil and gas piece to something closer to 15%.

Now, I have a friend who refers to any company
repeatedly flogged by Wall Street analysts while never quite seeming to meet
their lofty expectations as a “Next Year in Jerusalem” story, after the phrase concluding
the Passover Seder.No matter what
happens in the business, and how it varies from their expectations, the
analysts, metaphorically speaking, say “Next Year in Jerusalem!”

Granted, CLH deserved some free passes after beating
analyst expectations for eight straight quarters from mid-2010 to mid-2012, but
the streak ran out some time around the aforementioned Safety-Kleen
acquisition—which seemed like a good idea at the time to the cheerleaders (fee-generating
transactions generally do that!)—and the company failed to match expectations in 6
of the next 10 quarters, at least according to Bloomberg.

But don’t take our word for it: the
transformation of CLH’s from “beat and raise” to “hit or miss” is told in the
headlines from various so-called analyst reports along the way:

5/11:“Premier Mid-Cap Growth Story”

2/12:“Momentum Strong Enough to Raise 2012
Outlook, but Still Conservative”

Along the way, one large “activist” investor
accumulated a 9% stake in the company, but months later announced it was
shutting down its fund…and CLH began a strategic review, presumably with one eye
on the “activist” investor…but then oil prices collapsed (in the truest
sense of the word), putting a sudden damper on high-cost oil development in places
like the Canadian tar sands and the U.S. shale areas where CLH had been
planting its flag up until recently...so much so that shortly before year-end a “comp” to the company’s lodging
services business—called Civeo, which had been spun out of Oil States
International just last summer in order to “enhance shareholder value” at the
behest of the same kind of “activist” investor that had accumulated 9% of
CLH—shocked its own cheerleaders, saying thusly:

“The acceleration in November of the decline in global
crude oil prices and forecasts for a potentially protracted period of lower
prices have resulted in major oil companies reducing their 2015 capital
budgets…reducing the near-term allocation of capital to development or
expansion projects in the oil sands, which is a major driver of demand for the
company’s services in Canada.It has
also increased the difficulty of reliably estimating 2015 occupancy levels for
the company’s facilities…”

It wasn’t long ago—that 2013 “very bullish
analyst day,” in fact—that the company’s cheerleaders were congratulating CLH
for the lodging business being one of its highest return businesses.

Now, Warren Buffett likes to say that when a
management with a reputation for brilliance tackles a business with a
reputation for bad economics, “it is the reputation of the business that
remains intact.”But in the case of
Clean Harbors, the analysts like to say, “Next Year in Jerusalem!”

Jeff
Matthews

Author
“Secrets in Plain Sight: Business and Investing Secrets of Warren Buffett”

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